Bonds trading to spark interest

SHARE investors will soon be able to broaden their portfolios and dabble in Commonwealth Government bonds on the Australian Securities Exchange.

The barrier between retail investors and government bonds is about to be removed with legislative changes allowing Australians to trade in government bonds in the same way they do with shares.

Previously government bonds could be bought for between $1000 and $250,000 through the Reserve Bank of Australia or through fund managers.FIIG Securities chief executive Mark Paton says the changes could help give a much-needed boost to the nation's limited knowledge and understanding of the bond market."Bonds trading on the exchange is good, it opens it up to retail investors to go into that asset class and obviously starts a journey of educating and understanding investing in bonds," he says.

"Bond markets are very underdeveloped in Australia, there's not a profile about them. "Anything that lifts the dialogue around investing in bonds, whether it be government bonds or corporate bonds, we believe is a good thing in the market."

Investors who opt for government bonds are not usually drawn by their returns, which are relatively low.

These investors are more attracted by the security and certainty they offer.

"They are very low-yielding and if you are investing in a government bond you are thinking about your capital preservation," Paton says.

"You are getting a relatively modest return for the level of risk you are taking, which is a risk against the Federal Government failing." However, the Federal Government's guarantees of $250,000 per person per financial institution on cash in the bank can make bank deposits which often have higher interest returns more attractive. There are two types of Commonwealth Government bonds investors can buy:

Exchange-traded treasury bonds (TBs), which have an annual rate of fixed interest paid every six months.

Exchange-traded treasury indexed bonds (TIBs), where the capital value is adjusted for movements to the Consumer Price Index. Interest is paid quarterly at a fixed rate on the adjusted capital value.

John Smerdon, associate at Burrell Stockbroking and Superannuation, says these types of bonds could become an attractive prospect for self-managed super fund holders.

"Each self-managed super fund has an investment strategy which could include a percentage of Australian shares, property, international and cash and fixed interest," he says.

"These bonds will add another dimension to the fixed interest category within those asset allocations."

Smerdon expects the average investment in newly-listed bonds will be between $20,000 and $50,000, but says appealing interest rates will be need to be offered to attract investors.